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Bond Market Woes Could Spell Stock Opportunities

Evan Cooper Oct 25, 2016

It’s been axiomatic – since basically forever – that as interest rates fall, the stock market rises. Falling rates spur borrowing and economic activity, which in turn increases revenue and profits, which make stocks more valuable.

That’s the traditional story, at least, and while years of lower and lower interest rates haven’t done much to juice up the economy, they have pushed up equity prices in part, some believe, because all that money has had nowhere else to go.

The Impact of Rising Rates

While the debate continues, in academic circles and the real world, over the efficacy of central banks’ pedal-to-the-metal liquidity creation, the global bond market is starting to get nervous over signs that long-term interest rates could rise. Since interest rates are so low, even a little rate rise in absolute terms would be gigantic in percentage terms relative to where they are now. And that could mean significant principal losses for bond traders, since the value of their bonds will fall as yields rise; although the effects on those who held bonds to maturity wouldn’t be very great.

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